The kinds of business firms allowed in Egypt are determined by the Law of Commerce No. 17 of 1999 and the Companies Law No. 159 of 1981. The Law of Commerce deals mainly with the sole proprietor and the simple partnerships, whereas the Companies Law regulates in detail joint stock companies, limited partnerships by shares, and limited liability companies. Each of these structures will be discussed below in details.
A sole proprietor (or sole trader) is a natural person, who engages in a commercial activity for his or her own account.
To be licensed as a sole proprietor, the person should apply to the competent Commercial Registration Office for registration in the Commercial Register. The important requirements for this registration are:
a. The applicant should be of at least 21 years old
b. The applicant should be of Egyptian nationality unless he or she will carry out his or her activity under the Investment Law (at present law no. 8 of 1997), or will engage in exporting activity.
c. The applicant should use his or her own name as a trade name. This trade name should appear on his or her business firm or shop and its branches (if any), and in all his or her business correspondence;
d. The applicant should provide the Commercial Registration Office with other relevant important data such as the nature of his or her trade or business, the trade capital (no minimum capital is required), the addresses of the main firm, shop or branches (if any) and details of trademarks or copyrights (if any).
The Law of Commerce requires from the sole proprietor whose trade capital is L.E. 20,000 or more to keep proper accounting books.
The annual profit (taxable profit) of the sole proprietor, together with any other taxable incomes he or she may have from other sources, shall be subject to the income tax:
- The first L.E. 5,000 0%
- More than L.E. 5,000 up to 20,000 10%
- More than L.E. 20,000 up to 40,000 15%
- More than L.E 40,000 20%
The partnership is a kind of a business firm formed between two or more partners who are usually natural persons. There are two kinds of partnerships: the general partnership and the limited partnership. In the general partnership all the partners are considered as traders, and are jointly responsible to meet all the business liabilities or obligations without any limits. This means that if the partnership funds cannot meet its liabilities, creditors can recover their debts from the partners' private properties. The general partnership should have a trade name derived from the name(s) of one or more of its partners.
After concluding the partnership agreement the following is required to complete registration:
a. A copy of the partnership deed is published at the Court of First Instance where the partnership head office is located.
b. The partnership deed is published in two daily newspapers of wide circulation.
c. The partnership deed is registered in the Commercial Register (please refer to commercial registration requirements under the sole proprietor).
d. After completing the above registration, the partnership can start its commercial activity.
In the limited partnership at least one of the partners is a general partner who is active and is considered a trader with full responsibility to meet the partnership's liabilities or obligations without any limits. Other partners, who are called limited partners, are inactive or sleeping partners, and their liability in meeting the business liabilities or obligations is limited by the amount of capital they have invested in the partnership, and no more. The trade name of the limited partnership is derived from the name(s) of one or more of its general partners.
Foreigners can participate in partnerships, but they do not have the right to manage the partnership nor to sign on its behalf, and their share in its capital cannot exceed 49%.
No minimum capital is required. Regarding taxation, the general and limited partnerships are subject to the same tax provisions. The profit of the partnership itself as a legal entity is not taxable, but the share of each partner (general or limited) of this profit together with any other taxable incomes he or she may have is subjected, separately from other partners, to the unified income tax at the progressive rate scale applicable to sole proprietors, i.e. between 10% and 20% in addition to the state resources duty at 2%. Again each partner of a partnership is required to enroll himself or herself in the state social insurance system as a self-employed person.
Registration of a partnership requires concluding an agreement (the deed) between the partners determining the partnership capital and the share of each partner (general or limited), the object (activity) of the partnership, its duration, and the appropriation of its profits or losses, etc.
Joint Stock Companies
The Egyptian joint stock company is similar in its main features to the same kind of companies existing anywhere else in the world. Thus, it is a regulated company whose capital is divided into shares, the liability of each shareholder is limited to the value of his or her shares, and the shares can be traded in the stock exchange.
The number of founders of a joint stock company should not be less than three founders, and consequently the number of shareholders cannot go below three at any time.
The shares of a joint stock company, private or public, can be fully owned by foreigners, but they have to pay the value of their shares in the company in foreign convertible currencies.
To form a joint stock company, the founders (or an attorney on behalf of them) should submit an application to the Companies Department with the following documents required:
a. A list of the founders' names and details.
b. For founders who are corporations, a resolution from each corporate body indicating participation in the new company.
c. For founders who are of foreign nationalities, relevant data is required in authenticated or legalized form such as nationality, address, work or activity, documents of incorporation, etc.
d. The memorandum of association and the draft of the articles of association of the new company.
e. A certificate from the Egyptian bank receiving the share capital payments, which shows that each founder and ordinary shareholder has paid at least 25%. This 25% can be paid on two installments: 10% before applying to the Companies Department, and the remaining 15% within three months following the registration of the company in the Commercial Register.
The Companies Department will submit the application and attached documents to a Special Committee for Company Formation which will review the application and the documents. If the application and documents are complete and within the requirements of the Egyptian law and public order, the Committee will issue a resolution approving the formation of the new company, and accordingly the memorandum and articles of association of the new company are published in the Companies Bulletin.
Subsequently, the founders will apply to the Commercial Registration Office to register the new company in the Commercial Register, after which the company will be fully incorporated and can start its activity. The incorporation of a joint stock company usually takes 4 to 5 weeks to complete.
The minimum issued share-capital of a closed or private joint stock company (i.e. the company which does not offer its shares for public subscription) is LE 250 000, and that of a company which offers its shares (or part thereof) to public is LE 1000 000 of which at least 50% must be subscribed by the founders. At least 25% of the share-capital is to be paid during foundation and the rest over a maximum of five years.
The shares of a joint stock company, whether it is a private or a public company, can be traded in the Egyptian Stock Exchange. However, in-kind shares and founders shares cannot be traded in the Stock Exchange before the lapse of two financial years from the incorporation of the company. A foreign shareholder can sell his shares in the Egyptian Stock Exchange and can repatriate the proceeds of the sale abroad without any restrictions, and free of any taxes or duties.
The accounts of any joint stock company should be audited by an Egyptian certified auditor appointed by the shareholders in their annual general meeting. Banks and mutual funds should have at least two certified auditors.
The annual net profit of a joint stock company has to be appropriated in accordance with the provisions of the Companies Law and the related executive regulations as follows:
a. At least 5% of the net profit is set aside as legal reserve; adding to this reserve will cease when its amount reaches 50% of the issued share-capital.
b. At least 5% of the paid-up capital is payable to shareholders (and employees) as a first distribution. Of the remaining profit, a maximum of 10% is deducted as remuneration to the board of directors. The remaining profit may be distributed to the shareholders (and employees) as a second distribution, carried forward to next year, or set aside in a special reserve account.
c. The employees are entitled to receive, as part of profit-sharing, 10% of the first and second distributions mentioned above, but with a maximum of 100% of their annual salaries. Therefore, the actual dividends to the shareholders would be the total of the first and second distributions excluding the employees' profit sharing. The dividends are payable to the shareholders free of any taxes or duties.
d. The dividends of the foreign shareholder can be repatriated abroad through one of the accredited banks in Egypt without any restrictions, and free of any taxes or duties.
e. The net profit of the joint stock company, adjusted according to the provisions of the tax Law, will be subject to the Egyptian corporate tax whose standard rate is approximately 20%. However, profits of the Suez Canal Authority, the Egyptian Petroleum Authority and the Central Bank will be taxed at 40%. Oil and Gas exploration and production companies are taxed at 40.55%.
A joint stock company is managed by a board of directors composed of an odd number, which is not less than three. The board members, including the chairman, can be of foreign nationalities. The directors represent the shareholders in managing the company, and therefore are considered as attorneys or agents to the shareholders and not as employees of the company.
Each board member should own a number of the company shares called "directors' shares" of a value equal to L.E. 5000 unless the company's articles of association require a higher value. The value of the shares is based on the share's current value in the stock exchange, but if the shares are not on the stock exchange trading lists, the nominal value of the share will be the base for valuation. The directors' shares are deposited at one of the accredited banks in Egypt as a guaranty for good management, and cannot be disposed of as long as the board member is on the board.
The remuneration of the director, will be subject to an income tax same as applicable to sole proprietors.
Joint stock companies are supervised by the Companies Department to ensure its compliance with the Companies Law. However, companies dealing with securities (e.g. mutual funds, holding, venture capital and portfolio management companies) are supervised by the Capital Market Authority.
Limited Partnerships by Shares
The limited partnership by shares, or the "societe en commandite par actions" as called in France, is similar to the joint stock company with the exception that at least one of the founders has unlimited liability in meeting the company's financial liabilities. The company is prohibited from conducting the business of insurance, banking, or savings or investing funds on other people's behalf (Article 3 & 5 of the Companies Law).
The company is managed by the founder(s) of unlimited liability without any direct participation from the other founders or ordinary shareholders of limited liability. The founder(s) of unlimited liability who is managing the company is called the "manager", but his or her legal status is similar to the director of the joint stock company and the provisions applicable to these directors apply as well to the managers of limited partnerships by shares. The name and scope of such partner manager's authority must be specified in the Memorandum of Association (Article 111 of the Companies Law).
The company must have a Supervisory Board made up of at least three persons, whose purpose is to supervise the actions of the manager(s). As such, this Supervisory Board may not be chosen from the partner manager(s). (Article 112 of the Companies Law).
Thus, each manager should allocate part of his or her shares of no less than L.E. 5000 for good management, and these shares should be deposited at one of the accredited banks in Egypt, and cannot be disposed of as long as the unlimited founder is a manager of the company. The remuneration of the manager (excluding the dividends on his or her shares) after certain deductions or reliefs is subject to salary tax at the same rate as applicable to sole proprietors. In the limited partnership by shares, there should be a supervisory board composed of at least three shareholders, or outsiders who are chosen by the shareholders. The supervisory board will monitor the actions of the manager(s) in running the company. In this respect, the supervisory board will have the right to ask the manager(s) to provide it with management reports, and it can review the company's accounting records, and count the cash, the inventories and other company assets. The supervisory board will also give opinion regarding matters that the manager(s) may seek the board's opinion on. In addition, the general meeting of shareholders cannot amend the company's deed without the approval of the manager(s), unless the deed stipulates differently.
In case of the manager's death, the company will dissolve, unless the company deed stipulates that it will continue.
Apart from the above differences, the provisions related to joint stock companies will apply to limited partnerships by shares.
The minimum share capital required of a limited partnership by shares is LE 250,000. The capital is divided into two categories: (1) shares owned by founder partners, and (2) shares of equal value belonging to shareholders. The founder partners have unlimited liability while the shareholders' liability is limited to the value of their respective shares (Article 3 of the Companies Law).
Limited Liability Companies
The Egyptian limited liability company is a closed company where the liability of each of its partners is limited to the value of his or her shares (called quotas) in the company. The number of partners of a limited liability company cannot be less than two persons and cannot exceed fifty. The shares or quotas of the limited liability company cannot be traded in the stock exchange. The trade name of the limited liability company is usually derived from its object, but may also include the name(s) of one or more of its partners. Additionally, the words "Limited Liability Company" must be included in the name (Article 61of Ministerial Decision Implementing the Commercial Companies Law.)
The founding shareholders of the company must submit an application requesting permission to incorporate a limited liability company. The ministerial decision implementing the Commercial Companies Law outlines the mandatory provisions that must be included in the Memorandum of Association.
The company is incorporated once it is registered in the Commercial Register. The company must also maintain a Register of Partners in its head office, which must contain the names, nationalities, domiciles and occupations of the partners; the number of shares owned by each partner; the sum paid by each; and the assignment or transfer of shares and related relevant information (Article 275 of the Executive Regulation of the Companies Law).
Limited liability companies cannot raise funds (as capital or as loan) through public offering. Also such companies may conduct a variety of business activities, with the exception of insurance, banking, savings, receiving deposits or investing funds on behalf of others. (Article 5 of the Companies Law.)
The management of a limited liability company may be assigned to one or more managers. At least one manager must be of Egyptian nationality (Article 281 of the ministerial decision implementing the Companies Law). The manager(s) must be named in the Memorandum of Association but need not be a shareholder(s). The manager(s) may be appointed for a definite term (which must be specified in the Memorandum of Association) or for an indefinite term. The manager(s) shall have full authority to represent the company; unless such authority is limited by the Memorandum of Association.
The manager of the limited liability company has the same legal status of the director of the joint stock company. The remuneration of the manager, after certain deductions, is subject to a salary at rates 10% and 2%
If the number of the partners of a limited liability company exceeds ten, the partners should form a supervisory board consisting of at least three of them. The supervisory board has the right to check the accounting records of the company, ask the managers to provide reports upon request, count the company's cash and other assets, and review the company's financial statements before being submitted to the partners' general meeting.
Apart from the above, the provisions related to joint stock companies apply to limited liability companies.
The minimum equity capital of a limited liability company is L.E. 50,000. The equity capital should be fully paid up on foundation. The nominal value of the share or quota cannot be less than L.E. 100.
The quotas cannot be traded in the stock exchange, however, any partner can sell his or her quotas to outsiders, given that he has already offered them to the other partners and they declined to buy them.
Foreigners can own 100% of the equity capital of a limited liability company, but they have to pay the value of their shares in foreign convertible currencies.
If a foreign partner(s) in a limited liability company wishes to repatriate his or her capital out of Egypt, he or she has to sell his or her quotas or liquidate the company (if he or she actually owns all or most of it), deposit the proceeds of sale or liquidation in an account at one of the accredited banks in Egypt, and the bank will realize the required repatriation of the funds, free of any taxes or duties.
A limited liability company which has a share-capital equal to or exceeding the minimum share-capital of a closed joint stock company (i.e. LE 250 000) has to allocate at least 10% of the profit to be distributed among its partners to its employees as profit-sharing, but with a maximum of 100% of their annual salaries.